Raising funds through equity crowd funding and intellectual property considerations

Friday 4th April 2014

In February 2014, the Commerce Minister announced that Cabinet had approved regulations for equity crowd funding and peer-to-peer lending in New Zealand as part of the Government’s financial markets overhaul under the Financial Markets Conduct Act.

The Financial Markets Conduct (Phase 1) Regulations 2014 came into force on 1 April 2014. Under the Regulations, licensed service providers offering crowd funding and peer-to-peer lending will be exempt from the requirement to provide a prospectus or investment statement before raising funds from the public.
Previously, the heavy compliance costs around disclosure and governance made it prohibitive for businesses to offer shares through a crowd funding platform. The new measures are intended to give early-stage and high growth New Zealand businesses easier access to funding.  

What is crowd funding and peer-to-peer lending?

There are two types of crowd funding - donation-based crowd funding and equity crowd funding.  In both cases, the crowd funding activities are generally carried out through an online platform.
Donation-based crowd funding involves companies raising funds to achieve their funding objectives and, once achieved and in return, supplying products or other benefits to their funders.  The Regulations relate to equity crowd funding, which involves companies selling equity in their businesses to investors.  The Regulations describe the principal purpose of crowd funding as matching businesses wishing to raise funds with investors seeking to invest relatively small amounts. 
Peer-to-peer lending is where a business offers debt securities. The Regulations describe the principal purpose of peer-to-peer lending as matching lenders with borrowers who are seeking loans for personal, charitable or small business purposes.

Role of licensed service providers

Under the Act, crowd funding and peer-to-peer service providers must hold a licence to provide these services.  Once licensed, the service providers can then act as an intermediary between businesses issuing shares and investors by providing a facility (such as a website) where share offers can be made to the public.
Under the Act, while licensed service providers do not have to provide a disclosure statement or prospectus when fund raising, they are required (amongst other things) to comply with the fair dealing obligations in the Act (which are broadly similar to the provisions around misleading or deceptive conduct in the Fair Trading Act 1986), have a written client agreement with investors and have arrangements in place so that investors get information to help with share buying decisions.
If a fund raising service is only used for charitable or philanthropic fund raising and donors do not receive shares or a financial return, then the service does not qualify as a crowd funding service and does not require a licence under the Act.


While there are no investor caps, businesses will be permitted to raise no more than $2 million in any year.  This has recently been the subject of debate, with commentators and industry figures respectively arguing that New Zealand should follow the British approach, which prevents non-professional investors from putting more than 10% of their savings into equity crowd funding, and that the $2 million annual cap could be too high (with a higher risk of fraud).

Intellectual property

Many New Zealand businesses will now be thinking about equity crowd funding as a means of raising funds.  However, before disclosing their business concepts and other valuable information through their crowd funding activities, these businesses should think carefully about how best to protect the concepts and information.
Accordingly, a business should have a clear intellectual property strategy at the outset.  If the business has innovative or new products, it should discuss these with a patent attorney to determine if it could apply for patent or design registrations in relation to the products. 
These registrations would help to protect the businesses’ commercial advantage by excluding competitors from the markets in which protection is obtained.  There are also freedom to operate issues to consider as well. If a competitor has filed for patent and design protection that could cover the new products, then this could cause serious issues for the business in the future.  If patent and design applications are not filed before the products are sold then it becomes very difficult to obtain commercially relevant protection. 
In addition, the business should also think about registering its brand and logos as trade marks, and discuss this with a trade mark attorney. 
Establishing a portfolio of registered intellectual property will not only help to protect the business but also become a valuable business asset and assist the business in its fund raising activities.  


Equity crowd funding is a new way for early stage and high growth businesses to raise equity funding in New Zealand but, before starting their fund raising activities, businesses should first determine their intellectual property strategy and decide whether it is appropriate to apply to register key intellectual property.

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